• 01-23-2014 | 08:11 AM
• Author: Herb Jacobs

Do We Need More Financial Regulations?

When the Obama Administration argues that more financial regulation is needed to set us on the path to economic recovery, I would like to respectfully submit that the Great Recession could have been avoided, but its cause can be placed primarily on the shoulders  of government, not on greed on the part of investment bankers and business people. The Dodd Frank Financial Reform Act was the worst bill since Hawley met Smoot.

The Securities & Exchange Commission (the “SEC”) specifies which rating agencies qualify for being Nationally Recognized Statistical Rating Organizations or (“NRSRO”). Because the SEC gave such designations to Moody’s, Fitch and Standard and Poor’s, the SEC began assessing the credit quality of mortgage securitizations. However, the rating agencies were “gamed” by the investment bankers, who, if one rating agency said no to a securitization, they would go to another, and find a more receptive rating agency was found. As these agencies were after market share, they did, in large measure, what the investment bankers wanted, and given substantial stock option awards by these agencies, they caved.

Alan Greenspan, then head of the Federal Reserve, often argued that bubbles were impossible to detect and, furthermore, impossible to prevent. Perhaps that is true, but I would argue he should have been able to detect this bubble as the statistics offered clear  evidence.

In 1974 mortgage debt as a percentage of mortgage debt to GDP was a mere  28%, at its peak it rose to 105.13%. True Dr. Greenspan was no longer at the Fed but much of the explosion in mortgage debt took place under his watch.

Perhaps the most telling statistic is relating mortgage debt to personal income as shown below:

In 1982 mortgage debt to personal income was a paltry 33.45% and even between 1980 and 2000 for select years averaged roughly 72%. When mortgage debt to person income rose in 2005 to 115.06% alarm bells should have been ringing loudly within the Fed.

Senator Daniel Patrick Moynihan said it best, “Everyone is entitled to their own opinion but not his or her own facts.”

The author spent 36 years in commercial banking and last served as General Manager for Depfa Bank. He currently is teaching at NYU’s School of Continuing Education and is the author of “Handbook of Corporate Lending”  and “Case Studies in Corporate Lending,” both published by Amazon.

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